Indian investors pencil in better second half

NickGodt

MUMBAI (MarketWatch) — A two-week rally has helped lift sentiment and is leading more analysts to believe that Indian stocks, after putting in the worst performance of emerging markets in the first half of 2011, have priced in a lot of bad news and are now on their way to recovery.

Asia Today: IPOs delayed

Investors world-wide breathed a sigh of relief after Greece approved an austerity plan, even as uncertainty hangs over the IPO market in Asia amid volatility and concerns about global growth.

Although the Sensex (1) fell 83.07 points on Friday to finish the week at 18,762.80, that was following a six-session rally that saw the benchmark advance 7.4%.

On Friday, sellers also reacted to economic data, after HSBC’s purchasing managers index fell to 55.3 in June from 57.5 in May. And car sales mostly fell in India in June reflecting the impact of higher fuel prices and interest rates, including at Tata Motors Ltd. (500570) and at Maruti Suzuki India Ltd. (532500), where production was hit by a strike.

Still, the recent rally had led the Sensex to gain 1.9% in June, marking its first monthly gain since March. The S&P/CNX Nifty index rose 1.6% for the month.

Rising tide lifts all boats

The positive turn was accompanied by the return of foreign institutional investors into the Indian market since late last week. FIIs, as most global investors, have been encouraged to take risks as Greece seemed closer to avoid defaulting on its debt and crude oil futures slumped.

The strength of investment flows from overseas in the final week of June lifted overall net foreign equities investments to $45.7 billion for the month and to $26.7 billion year to date, according to the Securities and Exchange Board of India.

Indian stocks still posted quarterly losses, with the Sensex losing 3.1% and the Nifty down 3.2% over the past three months. This marked the second straight quarter of losses, following a 5.2% slide for the Sensex in the January-to-March quarter.

With the Sensex down 8.1% so far this year, Indian stocks have been the worst performers among Asian and emerging markets year to date. The MSCI Emerging Markets Index is down 0.7% for 2011 so far.

Time to buy Indian stocks?

At the same time as foreign institutional investors returned to the market over the past week, investment house Nomura turned positive on Indian stocks, saying the “headwinds facing the economy from inflation are beginning to subside.”

Nomura joined a number of other investment firms, such as UBS and Citibank, which have been making the same call for a while.

They had, however, that a turn-around in Indian stocks would be partly conditional on factors outside of India, such as the course of crude oil prices and Europe’s handling of its sovereign-debt crisis.

Domestic factors, such as high inflation that has led the Reserve Bank of India’s campaign to hike interest rates aggressively and to slow down growth in the previous quarter, have already been largely factored in stock prices, analysts at these firms argue.

Nomura raised its rating on interest-rate sensitive sectors such as India’s banks and real-estate groups, as well as infrastructure firms, to “overweight” from “underweight”.

DLF Ltd. (532868), India’s biggest developer, which was among the list of stocks upgraded by Nomura, jumped nearly 5% on Friday after Indian daily the Economic Times said the firm might sell its stake in special economic zones to reduce its debt.

For overall Indian producers and their stocks, some general positive trends might also be emerging, according to Nomura’s economist for India, Sonal Varma.

Speaking to reporters from Dow Jones, The Wall Street Journal, and MarketWatch, she said that among positive factors for companies’ margins was that they had already raised prices to account for higher production costs, and were showing no indications of bringing them back down even as commodities prices have slumped recently.

Crude oil lost 11% in the three months since March 31, largely on the back of an agreement between the U.S. and other members of the International Energy Agency agreement to release emergency reserves. Read more about crude oil.

Meanwhile, the year-on-year rate of increase in India’s wholesale price index for food articles fell sharply to 7.78% in the week to June 18, from 9.13% in the previous week.

Inflation fight not over

But in the near term, the Reserve Bank of India’s fight against inflation is not likely over.

After shielding India’s population, of which 60% lives under $2 a day, from the surge in crude oil prices for a year, the government last week authorized a hike in fuel prices to curb the losses at state-run refiners. Read more about the fuel-price hike.

The price of diesel was allowed to rise 3 rupees per liter, or 8%; kerosene to rise 2 rupees per liter, or 15%; and cooking gas to rise 50 rupees per cylinder, or 14%. The government already allowed a hike in gasoline prices in May.

The fuel-price hike is now expected to boost wholesale inflation close to, or even above 10%.

That has led economists, such as Barclays Capital’s Siddhartha Sanyal, to expect the RBI will deliver another rate hike in July, its 11th since March 2010.

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